FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Central bank expectations and yield adjustments remain the key driver for FX markets but jitters over the situation in the Middle East and its wider impact are now proving too hard to ignore. Although markets have managed to segregate event risk, Brent and WTI crude futures have broken through $110/bbl and $100/bbl respectively – levels which could prove damaging to the global economy at a particularly crucial time in the recovery. The wider fear is that central banks may need to move on policy far earlier than planned to contain inflation expectations, but risk a rise in borrowing costs that corporate and household sectors may not be prepared for. Overnight EURUSD and USDJPY both struggled to make any headway and traded in ranges of 1.3742-1.3785 and 81.96-82.52 respectively. Equities closed down almost 1% and Treasury yields finished modestly lower as they sold off following a weaker 5y Treasury auction.
The second-tier data releases and Fedspeak did not provide the dollar with broad support although existing home sales for January unexpectedly gained. Kansas City Fed President Hoenig and Philadelphia Fed President were unsurprising hawks. Plosser said tapering of QE2 is not necessary though the committee had not yet decided on an exit strategy and an early exit should not be ruled out if the economy continues to improve. Plosser also said they may need to change policy even with elevated unemployment and Hoenig warned of the dangers of loose monetary policy. US activity figures are due. Initial jobless claims are due and we are with consensus in looking for a dip down to 405k. The previous reading was the survey week for the broader Bureau of Labor Statistics payrolls report, which could mute the impact of a decrease in claims. But the resumption of a downtrend should be modestly positive for the dollar, though external developments again could be the larger driver.
EUR
German GDP for Q4 was confirmed at 4.0%y/y, 0.4%q/q, driven by strong export growth and public spending.
Yesterday’s CPI prints in France and Italy surprised to the downside, but the euro continues to be driven by policymaker comments and stays supported as the general tones remain hawkish. We believe the market right now risks being too optimistic on policy expectations, but with headline inflationary pressures rising ECB officials will likely maintain a hawkish stance but just short of the crucial “vigilance” threshold.
Slovakia Finance minister said that the next ECB President is likely to be German, unless Germany decide against this themselves.
GBP
Spencer Dale joined Martin Weale and Andrew Sentance in calling for rate hikes. Dale and Weale called for 25bp, while Sentance called for 50bp. Adam Posen continued to vote for further QE. The minutes were hawkish both on the vote front and on the tone, noting that ‘of those members not favouring a rise in Bank Rate, some thought that the case for an increase had nevertheless grown in strength’. Clearly this is a fundamental shift in stance from the BOE, and the question is now whether the hawks can entice 2 other members over to their camp. Sentance is due to leave the MPC in May so his call for 50bp of hikes suggests that he is trying to push through his policy before his departure. The key is whether they will get the two extra hawks by May, and sterling is likely to remain supported for the near-term, as speculation mounts that they might just be able to.
The BoE’s Sentance, Weale and Posen are not expected to offer any surprises at their upcoming speaking appearances. Fellow policymaker Miles said that inflation is worrying but also said there is no strong case to tighten policy faster than market rates are implying. He sees CPI falling sharply in 2012 and said it is unlikely the pound would drop due to loose monetary policy.
CBI reported sales are due today at 11:00 GMT and another decline to 28 (prev. 37) is expected.
AUD
Australian capex figures were solid, showing a rise of 1.3% in Q4 (cons. 4%) but our economists note the equipment capex rose 6.1%, and overall the result should add about 0.5% to GDP. Our economists note that the data reinforce the view that while there is some catch up needed in the economy in H1, the RBA may need to tighten further in H2, though consumers and the housing sector will feel the pressure of higher rates.
NZD
Prime Minister Key said the delay of the rebuilding of Christchurch following the recent earthquake will likely curb New Zealand’s economic recovery, though he did not expect a sovereign credit rating downgrade, in line with Moody’s comment that there would be no immediate impact on their Aaa rating.
TECHNICAL OUTLOOK
USDCHF clears 0.9329/01.
EURUSD BULLISH Rise through 1.3744 exposes 1.3826 and 1.3862 next. Near term support is at 1.3647.
USDJPY NEUTRAL Decline through 82.34 has exposed 81.78, while resistance lies at 82.89.
GBPUSD BULLISH Bullish pressure holds below 1.6279/99 resistance zone. Near-term support comes in at 1.6101.
USDCHF BEARISH Negative momentum continues; breach of 0.9329/01 support area has exposed 0.9241. Near-term resistance at 0.9506.
AUDUSD NEUTRAL 1.0158 and 0.9944 mark the near-term directional triggers.
USDCAD BEARISH Initial support is at 0.9816 ahead of 0.9745/12 area. Resistance at 0.9959.
EURCHF BEARISH Push below 1.2774 would expose 1.2709. Initial resistance at 1.2958.
EURGBP NEUTRAL Move above 0.8514 would expose 0.8533. Near-term support lies at 0.8384.
EURJPY BULLISH Focus is on 114.19, breach of this level would expose 114.94. Support holds at 112.09.
SCHEDULE
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